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Walt Disney Co (DIS) Doesn’t Need a Buyout to Thrive

Walt Disney Co (ticker: DIS) stock has lagged the Standard and Poor’s 500 index so far in 2017 as the company struggles to adapt to a changing television market.

Rumors of Disney merging with a larger content distributor have surfaced multiple times in recent quarters, but Credit Suisse analyst Omar Sheikh is the latest expert to throw cold water on the idea of a Disney buyout.

Sheikh says he understands why Disney may be tempted to seek a buyer rather than build its own digital distribution network from scratch. “We argue this scenario looks unrealistic given DIS’ size, but believe this is likely to remain a backstop theme for investors as the organic strategy develops in the coming years,” Sheikh says in a research note published Monday.

With a massive market capitalization of $167 billion, there are only a handful of potential buyers that could even consider taking on Disney. Earlier this year, RBC Capital analyst Amit Daryanan shot down rumors that Apple (AAPL) may be interested in using its sizable cash hoard to acquire Disney. Daryanani said the “odds are low” that Apple would choose to deviate from its history of generating its own organic growth rather than relying on large-scale acquisitions.

But just because Disney might not get acquired, long-term investors shouldn’t be too concerned about its struggling TV business, Sheikh says. Although ESPN and other cable businesses may continue to weigh on Disney’s financials and require significant investments in the near term, other Disney businesses are now well-positioned for the years ahead.

“After two years of slowing growth, we forecast DIS’ [earnings per share] and [free cash flow] will reaccelerate in 2018-19 driven by Studio, Media Networks and declining capital intensity at Parks,” Sheikh says.

ESPN, which has been losing roughly 300,000 subscribers per month for the past two years, may be Disney’s biggest wild card for long-term investors. Sheikh said the outcome of ESPN’s renewal negotiations with Major League Baseball and the National Football League in 2021 and 2022 will be critical for the network’s future.

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